Countries face higher debt bills due to climate risks

Countries that are vulnerable to climate change are paying significantly more to borrow from the financial markets, according to new research, as investors price in the risks.

The most vulnerable developing countries have already paid more than $40 billion in additional interest payments on their governments’ debt because of their exposure to climate change risks.

That is set to cost them a further $168 billion in the next decade, the study by academics from Imperial College Business School and SOAS University of London found.

The most affected countries include Ghana, Tanzania, Kenya, Bangladesh and Vietnam.

The UN-commissioned research is the first systematic attempt to quantify the relationship between climate change and the cost of capital for sovereign nations.

It compared the debt costs of developing countries identified as most vulnerable to climate change by a widely-recognised index compiled by Notre-Dame University in the US with those of less-affected developing nations and the G8 countries.

After taking into consideration other variables such as economic growth and fiscal data, the academics found that the countries most exposed to climate change can expect an “increasingly precarious [financial] situation”, according to Charles Donovan, director of the Centre for Climate Finance and Investment at Imperial College Business School, who is one of the authors of the study.

Mr Donovan said it was a “cruel irony” that countries which most needed additional investment to protect themselves from climate change were the ones most likely to bear higher debt costs.

The research also found that, although credit rating agencies do not explicitly identify climate risk as a factor in their work, it is implicitly reflected by their ratings. For example, a propensity towards drought will influence agricultural exports and thus foreign earnings.

“The specific types of climate risk that a country faces constitute a source of economic vulnerability, which feeds through into its financial indicators considered by rating agencies,” Mr Donovan said. — Financial Times.